This article also appeared in Finweek Magazine in their 07-March 2013 issue
In last week’s article we explored how growing too quickly could sometimes, but not always, be bad for your business. By contrast, even though it often gets a bad rap, slower, organic growth, could actually be a better strategy for your business in the long-run.
But first, an important question that needs to be answered is: what is organic growth? This talks to growing your business and raising your revenue and profits by continuing to do what you’re already doing, instead of growing through acquisitions or expanding into new markets. Even if you move into a new geographic area or use a new way of selling, if you’re still using your original business model, this is organic growth. Growth isn’t forced with external investment and the pace of growth is more natural, as the name implies. You’re simply working to create more sales.
So what are the issues to consider in the space of organic growth?
- Organic growth may be slower than rapid, venture-backed growth, but it isn’t slow. Organic Valley (no pun intended) is a prime example. In the US, since 1990 the organic foods industry has grown at a rate of 20% every year. Organic Valley, the largest co-operative of organic farmers in the USA and a leading organic brand, tapped into this trend and grew as the market grew. Founded in 1988, Organic Valley comprises 1,687 farmers in 35 states and three Canadian provinces. Their revenue from product sales climbed from $527m in 2008, to $715m in 2011 and $860m in 2012. Not bad for a farmer co-op.
- Fewer customers and narrower focus can help you grow more rapidly. Building a narrower customer focus and concentrating on fewer customers seems counter-intuitive to growth. However if executed right, this strategy usually leads to more growth instead of less. At the beginning, start-ups often experiment with different revenue models, adjusting to the needs of the market and their customers. The more agile start-ups continue with what works and what customers are willing to pay for, and drop what doesn’t work or doesn’t sell. After all, it would spell disaster to simply keep adding more and more products without giving any up. However once your business has become successful, you’ve probably built a brand and a unique value proposition around a particular product, service, or customer segment. To sustain this growth, the company’s leaders must become tighter in their focus, enabling them to develop and grow the business around that core strength. Those customers who pay more and cost less to serve, generate greater value for your company. So it makes sense to concentrate on these and to let go of the less profitable, more effort-sapping customers. The same is true for the less profitable products and services in your portfolio. This enables you to focus your resources on the products and services that bring in the most profit. Duncan Barbaro Sant is director of Alberta, a 200-person fire, safety, and security firm in Malta. In his words: “Rather than focusing on winning all the projects we come across and spreading our wings further than we possibly can, we have taken to choosing carefully the projects that make sense for us and that can sustain the company’s healthy growth. This will give us the time to monitor and exploit all the projects we are being awarded/accepting whilst keeping our clients faithful to our company.”
- When you grow your venture via strong management and effective planning, you get to know your business backwards. And customers like expertise.
- Organic growth is usually more sustainable in the long-term. You can grow your business at a speed that you’re comfortable with. This means having the time to put in place a strong foundation of management, support and operational staff, systems, procedures and technology. In businesses that grow rapidly, often there isn’t enough time to do this properly. And when faced with the inevitable rocky period, organically grown businesses that have a solid foundation are more likely to weather the storm. One such survivor story is Seventh Generation, a leading US brand of household and personal care products that protect human health and the environment. Founded in 1988, their first-year sales of $100,000 climbed to $7 million a mere two years later. Then the eco-bubble burst, as did Seventh Generation’s sales. After cost-cutting and layoffs, they broke even and went public in 1993. Sudden dramatic growth in the natural foods industry bolstered their wholesale business. In 1999, they bought back all their stock to protect the company from hostile takeovers that would have destroyed their mission. Over the first five years of the new millennium their sales grew almost 32% per year and reached nearly $50 million. In 2010, having been around for 22 years, their revenue reached an impressive $150m.
- Organic growth is usually safer than fast growth or growth through mergers and acquisitions. Why? Because you’re using a proven revenue model, and you know your market and customers well. You can test your model exhaustively, only expanding on to another model when your business is ready.
- Organic growth isn’t as hard on your finances. By reinvesting profit back into the business, you’ll be less likely to need outside investment – and the pressure and expectations from investors that invariably come with it.
- You can remain true to your vision. Less reliance on outside investment means you can remain true to your vision, like Seventh Generation did. The founders can grow into their roles and follow their visions over time. The pace of organic growth better allows staff to maintain their health and wellbeing, instead of working exhausting hours to keep up with excessively rapid growth.
- Cohesive culture. If your staff are either hired from the onset of the business or move to the newly set-up business, the culture and customs of the organisation can be upheld. However, with mergers and acquisitions, come the almost unavoidable culture clashes between the two different companies that must become one.
- Organic growth is cheaper than acquisitions. When a company buys another business, they’ll typically need to pay a premium. That premium itself can sometimes eradicate the entire value of the acquisitions.
- Genuine growth takes time. There is something to be said for slower, more natural growth, particularly when you are asking your members or customers to pay for your product or service. Customers want to experience the product or service. If they like it and it fills a real need, they will be more likely to pay for it and to tell others about it. This organic word of mouth and peer-endorsement is typically the best way to create genuine growth. This form of growth needs to be backed up by an incredible offering and enough time to develop that offering.
- Selling equity to grow: control versus speed. A classic dilemma many start-ups face is: “Do we grow more slowly, letting our customer sales and profits pay for our growth organically, while keeping control of the business? Or to grow faster, do we sell equity in exchange for outside funding that can pay for the resources we need to support that faster growth?” And if your investors don’t agree with your strategies, with their equity stake and greater control, they could fire you from the very business you founded. This trade-off of speed versus control is a deeply personal choice and a difficult one for any entrepreneur to make.
So what’s the takeaway? Organic growth isn’t for everyone. But if you get the timing and execution right and you’re in it for the long haul, it could be a very profitable, rewarding strategy for your business. So don’t be afraid to take time to grow.